ch01.pdf

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James A. Hall Chapter
Accounting Information Systems, 4th. Ed. The Information System
Study Notes Prepared by H. M. Savage ©South-Western Publishing Co., 2004 Page 1-1
CHAPTER 1
THE INFORMATION SYSTEM: AN ACCOUNTANT’S PERSPECTIVE
Many readers are exploring these study notes as part of a college or university course named
“accounting information systems.” There is often a misconception that AIS is just a course
about computers for accounting majors. And although the AIS course does involve
computers and is designed for accountants in training, it is more appropriate to regard it as a
course about information and about systems, computerized or manual, that process
accounting information. In business, the accounting information system is an integral part of
the accounting function.
This first chapter is designed to provide a perspective on the role of AIS in organizations. It
relates information to the normal activities of a business and interested parties. Accounting
and the AIS are put in their proper positions within the organizational structure. After
placing the accounting function in its place, the roles of the accountant, in relation to the AIS,
are discussed as user, designer, and auditor.
The objectives of this chapter are:
! to understand the primary information flows within the business environment;
! to understand the difference between accounting information systems and management
information systems;
! to be able to distinguish between information and data;
! to know the three fundamental objectives of all information systems;
! to know the principal features of a general model for information systems;
! to understand the difference between a financial transaction and a non-financial transaction;
! to be familiar with the functional areas of a business and their principal activities;
! to recognize the need for functional independence between accounting and other business
areas;
! to know the basic differences between the centralized and distributed approaches to data
processing;
! to understand the stages in the evolution of information systems; and
! to understand the relationship between external auditing, internal auditing, and IS auditing.

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Notes
I. The Information Environment
Although it does not appear on a Balance Sheet, information
is one of the most valuable assets most organizations possess.
Without good, accurate, and timely information, good
decisions cannot be made. Fig. 1-1, on page 3, represents the
decisions levels, internal and external constituencies, and
vertical and horizontal information flows in a typical business
organization.
We can expand on these ideas by noting that as information
moves up the pyramid, it is usually increasingly summarized
or aggregated. The higher in the organization that the
information is used, the broader, more aggregated, and less
timely it typically is. For example, operating personnel require
very timely, detailed information for immediate decisions, but
upper management usually focuses more on summary
information for longer time periods in making long-term
decisions. It is also worth noting that external users, such as
creditors and shareholders, have different information needs
from internal users.
A. What Is a System?
The term system has been so overused since the
personal computer has become popular that many
people assume that all systems must include a
computer. But what about the heating system in your
home or the skeletal system in your body? The
correct use of the word “system” merely implies two
or more related components working together to
achieve a common purpose. Follow closely the
discussion in the text of the significant elements:
C multiple components -- more than one,
C related in some way, and
C a common purpose.
Also of importance are the concepts of a subsystem
and subsystem interdependency. Your book presents
a schematic of an automobile in terms of its
subsystems. The illustration is a typical
organizational chart. We can represent a typical
College of Business Administration as both a
subsystem of a larger system (a whole university) and
also as comprised of subsystems, or departments,
itself. See below.
A particular concern for us as we move on to study
accounting systems is the reality that a system is only
as strong as its weakest link (subsystem). [The theory
of constraints is an approach to improving a system

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Notes
by identifying and then strengthening its weakest elements. See E.
Goldratt, The Theory of Constraints, North River Press, 1990.]
B. A Framework for Information Systems
After discussing the basic elements of systems in
general, the ideas are applied to the concept of an
information system.
Fig. 1-3, on page 8, presents a framework for
visualizing information systems. This figure also
identifies the different chapters which discuss the
individual elements, to show how the pieces fit
together. There are two key classes of systems:
accounting information systems (AIS) and
management information systems (MIS). Note
especially the components (or subsystems) of the
AIS. Much time in the course will be devoted to
these components. Notice that this does not suggest
that no other users of information technology exist in
organizations. Big users include engineering and
research and development people.
This section includes several important definitions.
Study them carefully. Your understanding of the
concepts to be presented depends on your clear grasp
of the meaning of the terms:
C information system,
C transaction, financial, and nonfinancial,
C accounting information system (AIS), and
C management information system (MIS).

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Notes
The distinction between an AIS and an MIS is
important. Professional and legal standards play an
important role in the operation of an AIS. This is a
notable distinction between an AIS and a more
general MIS. In addition, read carefully the
discussion of the changing role of accounting
information.
C. AIS Subsystems
There are several key components to the AIS:
C the transaction processing system,
C the general ledger/financial reporting
system, and
C the management reporting system.
Each of these is introduced here in Chapter 1, and
each will receive extensive coverage later in the book.
D. A General Model for AIS
Fig. 1-5, on page 12, is a diagram or model of an
AIS. This is an expansion of the simpler diagram of a
system shown below. It identifies four basic elements
of an information system: input, processing, storage,
and output, all within a control framework. Figure
1-5 is more specific in describing these
elements/activities.
Again there are terms you should understand fully:
C end users, both internal and external,
C data versus information,
C data sources, both internal and external,
C data collection,

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Notes
C data processing,
C database management,
C information generation, and
C feedback.
The section on data base management introduces
some of the terminology used to describe data
elements: data attributes or fields, records, and files.
E. Information System Objectives
Organizations do not devote sizeable resources and
effort to develop their accounting information system
for the fun of it or to employ accountants. In order to
pass the cost/benefit test, information systems must
satisfy the three objectives discussed:
C to support the stewardship function of
management,
C to support management decision making,
and
C to support the day-to-day operations of the
firm.
F. Acquisition of Information Systems
This section just hints at the complexity involved in
creating an information system. Two chapters of the
text tackle this very important task.
II. Organizational Structure
The second major section of Chapter 1 is a review of
organizational structure. Fig. 1-7, on page 18, shows the
flows of responsibility, authority, and accountability between
units of the organization. The role of information is closely
related. This section discusses the ways in which an
organization can be segmented or structured.
A. Business Segments
The three most common ways in which businesses are
segmented are by geography, product line, or
business function.
B. Functional Segmentation
Table 1-2, on page 19, relates the basic resources of
a business, materials, labor, capital, and information,
to the traditional business functions. Fig. 1-8, on
page 20, is a representation of the business
segmented by function. Use this material to organize
your thinking about the various functional areas.

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Notes
Having the functions well defined will make it easier
to grasp the activities within the various transaction
cycles.
Special attention is given to the two functions which
deal with the information resource: accounting and
computer services.
C. The Accounting Function
Look again at the sub-areas of the accounting
function as represented in Fig. 1-10. Note also what
falls under the finance function. These different tasks
are segregated for a reason.
This brief introduction to the accounting function is
intended to look at the two key activities of recording
and reporting. The success of the accounting
function in meeting the objectives discussed above
are dependent on the information reported having
value for decision making and being reliable. The
brevity of the discussion of the importance of
accounting independence should not be
misinterpreted.
D. The Computer Services Function
The other information-related function is computer
services. The two basic approaches to organizing this
function, centralized data processing and distributed
data processing, are introduced here.
III. Distributed Data Processing
When organizations first automated their accounting systems,
they had little choice but to acquire a large computer. These
were housed in centralized data processing departments.
Although these physical systems were centralized, most of the
programs run on them were application specific. The trend
today is toward distributing the data processing function. Note
the word is distributing, not decentralizing.
A. DDP Is Not Decentralization
Note in particular the distinction that is made between
simply decentralizing computer services and
integrating the pieces of a distributed data
processing system. How this is accomplished is
discussed later in the chapter under the topic network
architectures.
This section focuses on the disadvantages and
advantages of DDP. There is never an “always right
choice.” The factors of cost, control, etc., must be
traded against one another in making the choice.

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Notes
These relevant factors are important issues that you
should be aware of. As your text mentioned, newer is
not always better.
IV. The Evolution of Information Systems
Models
Over time, accounting systems have changed and grown both
in response to limitations and the availability of new
technologies. The evolution is often slow, and various
generations coexist. This text considers five information
system models. These are introduced here and further
developed later in the text.
A. The Manual Process Model
As the name implies, this is the old manual approach
to recording accounting transactions. Because it is
easier to visualize the flow of accounting information
in a manual system, it is very beneficial to study such
systems, although few exist in practice. The
discussion of parts of the accounting system that will
occur in Chapters 4 through 8 will always begin with
presentation of what happens in a manual system.
You will find it easier to follow the discussion of
automated systems after “seeing” the manual
processes.
B. The Flat-File Model
When accounting applications were first
computerized, different applications were developed
separately with files created for individual
applications – even if other parts of the organization
had use for the same information. The department
that developed the application owned the data and
typically did not share it with other units. Fig. 1-12,
on page 30, shows the situation that could occur if
three user groups collect and use customer sales
information. Note carefully the problems that result
in this situation because of the data redundancy that
results: data storage issues, data updating issues,
currency of information and task-data dependency.
You will often hear such established systems referred
to as legacy systems. One of the key concerns relates
to the difficulty in integrating data in flat-file systems.
C. The Database Model
Many of the weaknesses of a flat-file system are
overcome by a database model. As shown in Fig.
1-13, on page 32,, this model centralized an
organization’s data so that it can be shared by other
users. Because all data should not be accessible by

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Notes
all users, the database management system
(DBMS) serves as a gatekeeper, limiting access to
particular data sets to users who are authorized.
The database model can solve many of the problems
described above for the flat-file system through
elimination of data redundancy, single updates, and
maintenance of current values. In theory, the
database model can do this; however, many early
database systems came up short. These systems,
which along with flat files systems are referred to as
traditional systems, still had limitations. The
development of the relational database model has
led to significant improvements. Two examples
follow.
D. The REA Model
The REA model is based on the premise that data can
be represented with a framework that identifies the
organization’s resources, events, and agents. With
this approach to organizing accounting and non-
accounting data, user views can be developed as
needed to support all decision-making. Follow
carefully the example developed in the text. It is
simple, but complete. The next section provides a
discussion of the application of REA in a group of
systems referred to as Enterprise Resource Planning
(ERP) systems.
E. ERP Systems
ERP systems permit an organization to fully integrate
its key business processes – thus eliminating some of
the so-called silos. Data sharing and information
flows can facilitate common business practices across
the organization.
Adopting an ERP system is a major endeavor for an
organization, often taking several years.
V. The Role of the Accountant
The last section of Chapter 1 talks about the different roles that
accountants play with regard to the information system.
A. Accountants as users must decide what information
must be collected, how it must be processed, and how
it must be reported.
B. Accountants as systems designers must work with
computer professionals in designing the conceptual
system while the computer professionals handle the
physical system. Keep in mind that the AIS is the

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Notes
custodian of the accountant’s data and the processor
of his or her information. The AIS cannot be ignored.
C. Accountants as auditors must form opinions of the
fairness of a company’s financial statements. In
recent years the profession has broadened this attest
function. Assurance services include traditional
auditing but are also concerned with the quality of
information used by decision makers. Formation of
that opinion is dependent on the auditor’s ability to
evaluate the accounting system and have confidence
that its output is reliable. IT auditing is performed as
part of the financial audit to determine the integrity of
the organization’s information system. Internal
auditors are employees of the organization.
Review Questions for Chapter 1: 5-12, 14, 16, 18, 19, 21, 22, 25-36
Discussion Questions for Chapter 1: 3, 6, 9, 10, 17, 19, 20

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